New federal rules squash Pfizer deal; other area firms unaffected

Pharmaceutical giant Pfizer and Ireland-based Allergan scrapped their merger plans Wednesday, two days after the Treasury Department announced tough new rules to thwart U.S. companies' moving their headquarters overseas to lower their taxes.

The $160 billion deal would have been the biggest acquisition in drug industry history and would have created the largest pharmaceutical company in the world.

The new Treasury Department rules make it harder for companies, through a merger, to move their tax addresses out of the United States and then shift profits to low-tax countries, a process called inversion.

Pfizer, based in New York City, has 2,000 employees in Pennsylvania, in Collegeville and at a manufacturing plant in Carlisle.

The new rules do not apply to past inversions, such as the March 2015 acquisition of Botox-maker Allergan by generic drug maker Actavis.

Shire P.L.C., which has operations in Chesterbrook and global headquarters in Dublin, said Wednesday that it expects its merger with Baxalta Inc. near Chicago to close as planned in mid-2016.

Endo International, which reincorporated as an Ireland- based company in 2014 and has U.S. headquarters in Malvern, said after an initial review of the proposed Treasury regulations, "We do not expect any immediate impact on Endo's effective tax rate, and we do not believe the proposal impacts Endo's status as a foreign company or its existing debt."

Both Pfizer and Allergan are looking ahead.

Pfizer said it would go back to its original timeline for a decision by the end of 2016 on breaking up its brand-name drug business and its generic and non-patented drug division into separate companies. Pfizer will also look for merger and acquisition prospects and will pursue "other shareholder-friendly" opportunities, CEO Ian Read said in a statement.

Allergan's CEO, Brent Saunders, said his company was well able to deliver "sustainable growth" on its own, had strong brands and a promising drug pipeline, and expected to close the sale of its Actavis generics business to Teva Pharmaceutical Industries for $40.5 billion in June.

Teva, whose North America headquarters is in North Wales, employs more than 2,000 in the Philadelphia region.

"Pfizer remains a company in flux," Timothy Anderson, an analyst at Sanford C. Bernstein & Co., said in a client note. In 2011, Pfizer hinted that it might split up the company, but it instead bought Hospira and tried to buy AstraZeneca in 2014.

"Press reports claim it looked at GlaxoSmithKline and Valeant along the way," Anderson said.

With the Allergan deal dead, investors might assume Pfizer is "desperate" and "on the hunt again," Anderson wrote. "This may not necessarily be the case." Pfizer's business model "shows relatively steady growth" and "there is no impending cliff."

Usually, big pharma pursues large acquisitions out of desperation, Anderson said. "Here it could be argued that Pfizer saw a window to invert, they tried to seize the opportunity, but that didn't happen, so perhaps it is back to usual business once again."

Taxpayer groups and lawmakers were pleased with Treasury's actions and called on Congress to continue the effort.

Citizens for Tax Justice, a Washington advocacy group, said the Obama administration's actions, "while good and necessary, are only a partial solution.

"Only Congress has the power to pass laws that will permanently close the egregious loopholes in our tax code," the group said. "Americans should send people to Congress who are willing to do so."

John Colley, a professor at the University of Warwick Business School in Coventry, England, said perhaps now pharmaceutical companies "can focus on drug development rather than financial engineering."

Colley said a "significant proportion" of the $600 billion acquisition activity in the pharmaceutical industry in 2015 "was driven by U.S. tax rules and avoiding tax."

"In reality, growth through drug development has taken a backseat to a tax-driven strategy," he said.

Pfizer shares closed up $1.57, or 5 percent, to $32.93 Wednesday. Allergan shares closed up $8.19, or 3.46 percent, to $244.74 after falling 14.7 percent on Tuesday.

Pfizer gained a local presence after acquiring rival Wyeth in 2009 for $68 billion. At the time, Pfizer promised to squeeze $4 billion in costs after buying Wyeth, much of it in job cuts. Before the merger, Wyeth had its global pharmaceutical headquarters in Collegeville and 4,700 employees in the Philadelphia area.

lloyd@phillynews.com

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@LoydLinda